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The Southwest Power Pool (SPP) market relies on mitigated offers in its day-ahead market to ensure fair competition and prevent market power abuse. Offer mitigation is a critical tool that keeps energy prices competitive while maintaining system reliability. But what exactly is offer mitigation, and how does it work in SPP’s day-ahead market?
In this blog post, we’ll explore the purpose of mitigated offers, when and how they’re applied, and how they help ensure competitive pricing. We’ll also dive into what market participants need to know about how mitigation affects their bids and settlements. By the end, you’ll have a clear understanding of how this process supports a fair and efficient energy market.
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What offer mitigation is and why it matters
Offer mitigation is a process designed to prevent market participants from exercising market power by submitting bids that are significantly higher than their actual costs. In SPP, mitigated offers reflect the short-run marginal cost of production, ensuring that prices remain competitive and fair.
Without mitigation, generators with local market power could inflate their bids during times of transmission congestion or reliability issues, leading to price spikes that harm consumers and distort the market. Mitigation ensures that bids align with competitive market conditions, even in areas where supply options are limited.
When offer mitigation is applied in SPP
SPP applies offer mitigation only when specific conditions are met. The market is generally competitive, but mitigation kicks in during instances of local market power. This typically happens when transmission congestion or reliability issues isolate certain resources, giving them the ability to influence prices.
For example, if a transmission constraint creates a bottleneck, only a few generators may be able to serve the affected area. In such cases, SPP uses mitigated offers to replace market offers that exceed competitive price levels. This ensures that prices reflect the true cost of production rather than inflated bids.
How mitigated offers ensure competitive pricing
Mitigated offers are a safeguard against price manipulation. By requiring market participants to submit cost-based bids, SPP ensures that energy prices remain fair and transparent. This not only protects consumers but also fosters trust in the market.
For instance, mitigated offers are used in the Day-Ahead Market, Real-Time Balancing Market, and Reliability Unit Commitment (RUC) processes. They apply to key offer parameters like energy offer curves, operating reserve offers, and start-up costs. By replacing inflated bids with cost-based offers, SPP prevents price spikes while maintaining system reliability.
What market participants should know about mitigation
Market participants need to understand how mitigation affects their bids and settlements. When submitting offers, participants must follow SPP’s Mitigated Offer Development Guidelines, which outline how to calculate costs like fuel, variable operations, and maintenance.
If a participant’s offer is mitigated, SPP provides detailed feedback, including the reason for mitigation and any relevant transmission constraints. Participants can dispute mitigated offers, but until the dispute is resolved, they must use the mitigated offer determined by SPP’s Market Monitor. If the dispute is resolved in the participant’s favor, SPP provides make-whole payments to compensate for any financial losses.
How mitigated offers support a fair and efficient market
Mitigated offers are more than just a regulatory requirement—they’re a cornerstone of SPP’s commitment to competitive pricing and market integrity. By preventing market power abuse, SPP ensures that all participants operate on a level playing field, fostering a market that’s both fair and efficient.
For market participants, understanding the rules around mitigated offers is essential. By submitting accurate, cost-based bids and staying informed about mitigation processes, participants can navigate the market effectively while contributing to its overall reliability and fairness.
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